Dairy Outlook. February By Jim Dunn Professor of Agricultural Economics, Penn State University. Market Psychology

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1 Dairy Outlook February 2017 By Jim Dunn Professor of Agricultural Economics, Penn State University Market Psychology The Class III price in January was $0.63 lower than in December, while the Class IV price was up $1.22. Class III continues to be well ahead of Class IV. Cheese prices have been falling, dropping 10 cents/lb. since the New Year. The cheese market spiked briefly in early February. Of course, the holiday entertaining season is now over, so seasonal cheese demand in the next few months will be lackluster. Also, the dollar is still strong, and the value of the Euro, Australian, and New Zealand dollars all rose in January relative to our dollar, helping our exports compete in the world market. Cheese prices fell 6% in January, while butter, skimmilk powder and dry whey prices all rose in the last month, with the butter and skim up by 4 to 5%, and dry whey is up 18%. Dairy exports have improved somewhat, in part because milk production is dropping in Europe, Australia, and New Zealand, no doubt in response to the continuing low milk prices. Butter and skim milk powder futures are stronger for most of 2017, no doubt in response to decreasing milk production by the other dairy exporters. Mexico continues to be our largest dairy product customer, although its purchases through October were below Canada is our third largest customer and Canadian purchases were up 11% through October. Export tonnage is greater than last year for almost all dairy product categories, although the lower prices mean revenue is less. Table 1 shows recent dairy class prices, plus the futures prices for Class III and class IV prices are expected to be higher for all of 2017 than in My estimated average for the Pennsylvania All Price for 2017 is $3.38 higher than the average of Nationally, California has received a lot of rain and snow and, for the first time in several years, the latest drought monitor shows less serious drought. In contrast, the drought in the Northeast is a bigger issue than California. The long-term issues depressing dairy prices are still the strong dollar, 1

2 the Russian embargo on EU dairy imports, problems in the Middle East, and, to some extent, the struggling Chinese economy. Overall the outlook for milk prices for 2017 is much better. Since feed prices will remain low, dairy profitability this year should be much improved. Corn and Soybean Markets Corn and soybean meal prices are essentially the same as last month, with the corn price and soybean meal price each up a few percent. The South American corn and soybean crops will have record yields and production. U.S. exports of corn and beans are large despite the strong dollar. There is no particular reason to expect corn and soybean meal to increase in the near future with large inventories worldwide. Income over Feed Costs (IOFC) Penn State s measure of income over feed costs rose by 0.5% in January from its December value. Figure 1 shows how these values compare to recent years. December s income over feed cost is $1.01 higher than November, and the highest value of Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Table 2 shows the monthly data for the past two years. The net revenue per hundred pounds of milk (milk margin) is shown in Table 3. The milk margin is the estimated amount of the Pennsylvania all milk price that remains after the feed costs per hundredweight of milk production are paid. Like income over feed cost, this measure shows that the Jannuary PA milk margin was 0.5% higher than in December. The Pennsylvania drought continues, with much of the state and the region still having moderate drought. Production The latest U.S. milk production report showed December milk production up 2.2% from a year earlier on a 30-day month basis (Figure 2). This milk production increase is unduly optimistic, given since the tight export market, and, the strong 2

3 dollar. Luckily, the other dairy exporters are decreasing milk production. production in Pennsylvania in December was 1.6% over its 2015 level. Given the surplus of milk in the Northeast, finding markets for all this milk may be a challenge. As is seen in Figure 3, cow numbers grew slightly from November and increased by 0.41% over December of last year. Although this increase in cows is very small, milk production growth nationally will inhibit attaining higher milk prices, although the stronger domestic market is helping. Table 1. Prices and Futures Prices for 2016 and 2017 (Based on futures prices of February 6, 2017) PA All PA All 2016 Class III Class IV 2017 Class III Class IV $/cwt $/cwt $/cwt $/cwt $/cwt $/cwt Jan $13.72 $13.31 $17.40 Jan $16.47 $16.43 $19.77 Feb $13.80 $13.49 $17.10 Feb $16.95 $16.70 $20.14 Mar $13.74 $12.74 $16.30 Mar $17.30 $16.91 $20.41 Apr $13.63 $12.68 $16.20 Apr $17.48 $17.12 $20.60 May $12.76 $13.09 $15.90 May $17.56 $17.34 $20.75 Jun $13.22 $13.77 $15.80 Jun $17.67 $17.50 $20.88 Jul $15.24 $14.84 $16.90 Jul $17.82 $17.71 $21.05 Aug $16.91 $14.65 $18.76 Aug $17.84 $17.84 $21.12 Sep $16.39 $14.25 $17.90 Sep $17.90 $17.90 $21.18 Oct $14.82 $13.66 $17.70 Oct $17.80 $17.85 $21.11 Nov $16.76 $13.76 $18.65 Nov $17.64 $17.73 $20.97 Dec $17.39 $15.05 $19.57 Dec $17.35 $17.49 $20.71 Annual $14.87 $13.77 $17.35 Annual $17.48 $17.38 $20.72 Annual -$ $ $ 1.13 Annual $ 2.62 $ 3.60 $ 3.38 % -5.7% -3.6% -6.1% % 17.6% 26.2% 19.5% 3

4 Table 2: PA Income over Feed Costs Feed Income All Cost per over feed Price 65 lbs. cost Month Jan-16 $17.40 $4.53 $6.68 Feb-16 $17.10 $4.57 $6.55 Mar-16 $16.30 $4.55 $6.05 Apr-16 $16.20 $4.39 $6.14 May-16 $15.90 $4.65 $5.69 Jun-16 $15.80 $4.28 $5.99 Jul-16 $16.90 $4.23 $6.75 Aug-16 $17.50 $4.34 $7.04 Sep-16 $17.90 $4.38 $7.26 Oct-16 $17.70 $4.50 $7.00 Nov-16 $18.65 $4.59 $7.53 Dec-16 $19.57 $4.18 $8.54 Jan-17 $19.80 $4.28 $8.59 Table 3: PA Margin All milk price per cwt. Feed cost per cwt. margin per cwt. Jan-16 $17.40 $7.12 $10.28 Feb-16 $17.10 $7.03 $10.07 Mar-16 $16.30 $7.00 $9.30 Apr-16 $16.20 $6.76 $9.44 May-16 $15.90 $7.15 $8.75 Jun-16 $15.80 $6.58 $9.22 Jul-16 $16.90 $6.51 $10.39 Aug-16 $17.50 $6.67 $10.83 Sep-16 $17.90 $6.73 $11.17 Oct-16 $17.70 $6.38 $11.24 Nov-16 $18.65 $7.07 $11.58 Dec-16 $19.40 $6.92 $12.48 Jan-17 $19.80 $6.58 $13.22 Figure 1: PA Dairy Income over feed cost 4

5 mil. lbs. $/cow/day PA Dairy Income over Feed Cost yr avg 2 0 Jan Mar May July Sept Nov Figure 2: Production 18,500 18,000 17,500 Monthly Production 30 Day months ,000 16,500 16,000 15,500 Jan Mar May Jul Sep Nov Source:USDA 5

6 1000 head Figure 3: Dairy Cows 9,500 Number of Dairy Cows ,000 Jan Mar May Jul Sep Nov Source:USDA 6